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Kinder Morgan Declares Dividend of $0.125 for Second Quarter 2016

Joint Ventures and Asset Sales to Reduce Debt by $3 Billion and Create Long-Term Value

HOUSTON--(BUSINESS WIRE)-- Kinder Morgan, Inc. (KMI) (NYSE: KMI) today announced that its board of directors approved a cash dividend of $0.125 per share for the quarter ($0.50 annualized) payable on Aug. 15, 2016, to common shareholders of record as of the close of business on Aug. 1, 2016. KMI expects to declare dividends of $0.50 per share for 2016 and use cash in excess of dividend payments to fund growth investments and strengthen its balance sheet.

Since the end of the first quarter, KMI has made significant progress towards enhancing its credit profile. The most substantial progress came from two recently announced joint ventures: KMI’s agreement to partner with Southern Company through the anticipated sale of a 50 percent interest in the Southern Natural Gas (SNG) pipeline system for expected cash consideration of $1.47 billion plus Southern Company’s share of SNG debt, and KMI’s completed sale of a 50 percent interest in its $500 million to-be-constructed Utopia pipeline project to Riverstone Investment Group LLC (Riverstone) for half of the project capital costs plus an amount in excess of its share of project capital.

“We are pleased to have taken substantial steps towards achieving our stated goals of strengthening our balance sheet and positioning the company for long-term value creation. Driven by the joint ventures with Southern Company on our SNG system and Riverstone on our Utopia pipeline project, we expect to end the year at a leverage ratio of 5.3 times net debt-to-Adjusted EBITDA, down from our previous guidance of 5.5 times,” said Richard D. Kinder, executive chairman. “We are now closer to reaching our targeted leverage level, which will position us to return substantial value to shareholders through some combination of dividend increases, share repurchases, attractive growth projects or further debt reduction.

“We are also pleased with KMI’s operational performance for the quarter despite continued volatile market conditions. We continue to expect our 2016 distributable cash flow in excess of our dividends will exceed our 2016 growth capital expenditures, eliminating our need to access the capital markets to fund growth projects in 2016. Moreover, given our efforts to high-grade our backlog, we do not expect to need to access the capital markets to fund our growth projects for the foreseeable future beyond 2016.”

President and CEO Steve Kean said, “We had a good second quarter and once again, Kinder Morgan demonstrated the resiliency of its cash flows, generated by a large diversified portfolio of fee-based assets. KMI generated earnings per common share for the quarter of $0.15, and produced distributable cash flow of $0.47 per share relative to our $0.125 per share dividend, resulting in $770 million of excess distributable cash flow above our dividend.

Kean added, “We continue to drive future growth by completing significant infrastructure development projects in our sizable project capital backlog. Our current project backlog is $13.5 billion, down from $14.1 billion at the end of the first quarter of 2016. This reduction resulted from the removal of half of our Utopia pipeline project capital, which will now be funded by Riverstone, reduced scope and cost estimates on a Natural Gas Pipelines segment project, and placing the Magnolia State tanker in service. Excluding the CO2 segment projects, we expect the projects in our backlog to generate an average capital-to-EBITDA multiple of approximately 6.5 times,” Kean said.

KMI reported second quarter net income available to common stockholders of $333 million, unchanged from the second quarter of 2015, and distributable cash flow of $1,050 million versus $1,095 million for the comparable period in 2015. The decrease in distributable cash flow for the quarter was primarily attributable to lower contributions from the CO2 segment primarily due to lower commodity prices, higher preferred stock dividends and higher cash taxes, partially offset by increased contributions from the Products Pipelines and Terminals segments as well as lower interest expense. Net income available to common stockholders was also impacted by a positive $31 million change in total certain items for the quarter from the second quarter of 2015, including a $39 million payment received for early termination of a customer storage contract in the Texas Intrastate Natural Gas Pipeline Group.

For the first six months of 2016, KMI reported net income available to common stockholders of $609 million, compared to $762 million for the first six months of 2015, and distributable cash flow of $2,283 million versus $2,337 million for the comparable period in 2015. The decrease in distributable cash flow was primarily attributable to lower contributions from the CO2 segment and higher preferred stock dividends, partially offset by increased contributions from the Products Pipelines and Natural Gas Pipelines segments. Net income available to common stockholders was further impacted by a $75 million unfavorable change in total certain items for the first six months of 2016 from the same period of 2015, including a $170 million write-off of costs associated with the Northeast Energy Direct Market and Palmetto Pipeline projects during the first quarter of 2016.

2016 Outlook

For 2016, KMI expects to declare dividends of $0.50 per share. For 2016, KMI's budgeted distributable cash flow was approximately $4.7 billion and budgeted Adjusted EBITDA was approximately $7.5 billion. Consistent with the updated guidance provided last quarter, the company continues to expect Adjusted EBITDA to be about 3 percent below budget and distributable cash flow to be about 4 percent below budget. To be consistent with last quarter, this guidance is presented without taking the SNG transaction into account. KMI does not provide budgeted net income attributable to common stockholders (the GAAP financial measure most directly comparable to distributable cash flow and Adjusted EBITDA) due to the inherent difficulty and impracticality of quantifying certain amounts required by GAAP such as ineffectiveness on commodity, interest rate and foreign currency hedges, unrealized gains and losses on derivatives marked to market, and contingent liabilities.

KMI expects to generate excess cash sufficient to fund its growth capital needs without needing to access capital markets and, after taking into account efforts to improve the balance sheet, expects to end the year with a net debt-to-Adjusted EBITDA ratio of approximately 5.3 times, below the budgeted ratio of 5.5 times. KMI’s growth capital forecast for 2016 is approximately $2.8 billion, a reduction of $500 million from its budget of approximately $3.3 billion.

The overwhelming majority of cash generated by KMI is fee-based and therefore is not directly exposed to commodity prices. The primary area where KMI has commodity price sensitivity is in its CO2 segment, and KMI hedges the majority of its next 12 months of oil production to minimize this sensitivity. Additionally, KMI continues to closely monitor counterparty exposure and obtain collateral when appropriate. However, the company has operations across a broad range of businesses and has a large customer base, with its average customer representing less than one-tenth of 1 percent of annual revenues. Additionally, approximately two-thirds of KMI’s business is conducted with customers who are end-users of the products KMI transports and stores, such as utilities, local distribution companies, refineries and large integrated firms.

Overview of Business Segments

“The Natural Gas Pipelines segment’s performance for the second quarter of 2016 compared to the same period during 2015 included increased contribution from Tennessee Gas Pipeline (TGP) driven by expansion projects placed into service during 2015 and improved performance on the Hiland midstream assets. This growth was offset by declines attributable to lower commodity prices and reduced volumes affecting certain of our midstream gathering and processing assets, the expiration of a minimum volume contract at KinderHawk during 2015 and a customer contract buyout at Kinder Morgan Louisiana pipeline during 2015,” Kean said.

Natural gas transport volumes were up 3 percent compared to the second quarter last year, driven by higher throughput on TGP due to projects placed in service, higher throughput on NGPL due to deliveries to Sabine Pass LNG facility and to South Texas to meet demand from Mexico, and higher throughput on El Paso Natural Gas pipeline due to additional deliveries to Mexico and the desert southwest. These increases were partially offset by lower throughput on the Texas Intrastate Natural Gas Pipeline Group due to lower Eagle Ford Shale volumes, and lower throughput on Fayetteville Express Pipeline due to lower production from the Fayetteville Shale. Gas gathered volumes were down 16 percent from the second quarter last year due primarily to lower natural gas volumes from the Eagle Ford Shale. Power generation throughput on Kinder Morgan pipelines was up 8 percent this quarter compared to the second quarter of 2015, which was 16 percent higher than the second quarter of 2014.

Natural gas continues to be the fuel of choice for America’s evolving energy needs, and industry experts are projecting gas demand increases of approximately 35 percent to over 105 billion cubic feet per day (Bcf/d) over the next 10 years. Over the last 2.5 years, KMI has entered into new and pending firm transport capacity commitments totaling 8.1 Bcf/d (1.8 Bcf/d of which is existing, previously unsold capacity). Of the natural gas consumed in the United States, about 38 percent moves on KMI pipelines. KMI expects future natural gas infrastructure opportunities will be driven by greater demand for gas-fired power generation across the country, liquefied natural gas (LNG) exports, exports to Mexico and continued industrial development, particularly in the petrochemical industry.

“The CO2 segment was impacted by lower commodity prices, as our realized weighted average oil price for the quarter was $62.17 per barrel compared to $72.82 per barrel for the second quarter of 2015,” Kean said. “Combined oil production across all of our fields was down 9 percent compared to 2015 on a net to Kinder Morgan basis, primarily driven by lower SACROC production, although SACROC’s production was only slightly below our plan. Second quarter 2016 net NGL sales volumes of 10.32 thousand barrels per day (MBbl/d) were down 2 percent compared to the same period in 2015. Net CO2 volumes increased 4 percent versus the second quarter of 2015. We continued to offset some of the impact of lower commodity prices by generating cost savings across our CO2 business,” Kean said.

Combined gross oil production volumes averaged 55.3 MBbl/d for the second quarter, down 8 percent from 59.9 MBbl/d for the same period in 2015. SACROC’s second quarter gross production was 15 percent below second quarter 2015 results, but only slightly below plan, and Yates gross production was 2 percent below second quarter 2015 results, but slightly above plan for the quarter. Second quarter gross production from Katz, Goldsmith and Tall Cotton was 22 percent above the same period in 2015, but below plan. The average West Texas Intermediate unhedged crude oil price for the second quarter was $45.59 per barrel versus $57.94 for the second quarter of 2015.

“The Terminals segment experienced strong performance at our liquids terminals, which comprise more than 75 percent of the segment’s business. Growth in the liquids business during the quarter versus the second quarter of 2015 was driven by various expansions across our network, including contributions from new operations at our Edmonton Rail, Galena Park, Pasadena and Deer Park Rail terminals. Contributions from our interest in the newly formed refined products terminals joint venture with BP, our Vopak terminals acquisition and the Jones Act tankers also contributed significantly to growth in this segment,” Kean said. The Lone Star State and Magnolia State tankers were delivered in December 2015 and May 2016, respectively.

Growth from the liquids terminals was partially offset by a decline in the bulk terminals as compared to the same period in 2015. This reduction was driven by the bankruptcies of coal customers Arch Coal, Alpha Natural Resources and Peabody Energy, which had a negative year-over-year impact of approximately $19 million for the quarter.

“The Products Pipelines segment was favorably impacted by higher volumes on the Kinder Morgan Crude and Condensate pipeline (KMCC), the startup of the second petroleum condensate processing facility along the Houston Ship Channel during 2015 and favorable performance on our Cochin system compared to 2015 due to third-party operational constraints downstream of the pipeline which occurred during the second quarter of 2015,” Kean said.

Total refined products volumes were down 1 percent for the second quarter versus the same period in 2015, reflecting a decrease in East Coast volumes due to increased imports, partially offset by increased throughput on our West Coast assets. NGL volumes were flat with the same period last year. Crude and condensate pipeline volumes were up 11 percent from the second quarter of 2015 primarily due to higher volumes on KMCC.

Kinder Morgan Canada experienced high demand for capacity on the Trans Mountain pipeline system in the second quarter, with mainline throughput into Washington state up 25 percent from the same period last year. This was partially offset by an unfavorable foreign exchange rate, as the Canadian dollar declined in value against the U.S. dollar by approximately 5 percent since the second quarter of 2015.

Other News

Natural Gas Pipelines

  • On July 10, 2016, KMI and Southern Company announced a joint venture through Southern Company’s anticipated acquisition of a 50 percent equity interest in the SNG pipeline system. Including SNG’s existing debt and the expected $1.47 billion cash consideration for Southern Company’s 50 percent share of the equity interest, the transaction implies a total enterprise value for SNG of approximately $4.15 billion. In addition, the agreement commits the companies to cooperatively pursue specific growth opportunities to develop natural gas infrastructure for the strategic venture.
  • On June 1, 2016, Elba Liquefaction Company and Southern LNG Company received authorization from the FERC for the Elba Liquefaction Project. Subject to receipt of final permits and authorizations, the approximately $2 billion project will be constructed and operated at the existing Elba Island LNG Terminal near Savannah, Georgia. Requests for...

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